How to plan for retirement—and a recession

It’s been just over a decade since the last recession when the TSX lost 35 percent of its value—or about C$700 billion—but the event remains fresh in the memories of retirees who were living off their investments at the time.

The market correction in the fourth quarter of 2018, and the increased volatility overall in the past couple of years, are reminders for this age group to ensure their income needs will be met when they slow down or stop working altogether.

How to find the “right” equities mix

Retirees are often advised to reduce their equity exposure as they age, to better prepare for potential market shocks. While every investor’s personal circumstance and risk tolerance is unique, a standard practice for investors is to hold a percentage of stocks equal to 100 minus their age. For a 60-year-old, for example, it would mean 40 percent of their portfolio would be in equities.

This rule may be good for some, but not followed as strictly today, given people are living longer and may need to stretch their retirement savings.

“Equities are still an important part of any retirement portfolio,” says Howard Kabot, vice president of financial planning at RBC Wealth Management. “You may want to reduce your exposure to equities as you retire, but not completely come out of them.”

The right mix of stocks, bonds and other assets comes down to an investor’s risk tolerance, income and spending habits and, of course, their retirement goals. Determining that ideal mix begins with having a personalized financial plan.

“Whether you’re in your 20s or 70s, if you’re not sure what your goal is, and don’t have a written plan letting you know how you’ll reach that goal, you’re not going to know what decisions to make, especially in a market downturn,” says Allison Marshall, vice president of high-net-worth planning services and financial advisory support at RBC Wealth Management.

The benefits of a financial plan

A financial plan for retirees will include various projections to help them determine whether their assets will provide them with the income required to fund their retirement, says Abby Kassar, vice president of high net worth planning services at RBC Wealth Management.

“A financial plan provides projections to allow people to decide if they can retire at the desired age, such as 60 or 65, or if they need to continue to work to build their savings to the level required to meet their retirement funding,” Kassar says. “A plan can also allow them to project the value of assets remaining in their estate that they may wish to leave to their beneficiaries.”

Estate value projections are helpful when retirees are considering gifting assets to their children during their lifetime, to help them purchase a home, or to making a large charitable gift while they’re still alive. “The projections can help ensure they’ll have sufficient assets remaining to support their lifestyle during retirement, even after a gift,” she says.

A financial plan should also include alternative projections, using different rates of return, to account for a possible market drop and the impact on the value of the assets and investments.

“The last thing you want is to be in a position where you’re forced to draw out funds during a downturn,” says Marshall. “If you maintain the discipline and perspective during a market downturn — with a plan in place — that will go a long way to overcoming the stress of where the markets are on a day-to-day basis,” Marshall says.

Have your “financial house” in order

To help prepare for a recession beyond investments, retirees should also ensure they have their “financial house” in order, says Kabot.

“It’s actually a good approach for everyone, in good times and in bad,” he says.

For pre-retirees in particular, who are looking for more income as they age, Kabot suggests paying down debt, starting off with loans that have the highest interest rate. “If you can, consolidate debt into a credit line and pay down any lingering credit card debt, which can have very high-interest charges,” he says. “Luckily, if you have debt, a recession will pretty much guarantee low-interest rates will continue, so that’s one positive for debt holders.”

As for income, he says people with defined benefit pensions can rest easy, given those payments are likely to remain intact. “If it’s a defined contribution plan, then those assets may be exposed to market risk,” Kabot says.

Retirees should also have a tax-efficient strategy for how and when to collect government income such as the Canada Pension Plan and Old Age Security, says Kassar.

“They want to make sure they’re using the income sources that allow them to take certain tax credits, such as income splitting, where appropriate,” she says. A more tax-efficient income strategy can be particularly helpful during a recession, particularly if investors don’t want to draw funds from their investment portfolios.

Lastly, Kassar says retirees should make sure they have a Will and power of attorney in place to ensure their assets are passed on based on their wishes. Having an updated, comprehensive Will and estate plan will also reduce the stress on beneficiaries because they’ll understand what to do with the assets they’re given. Having a Will can also prevent the forced sale of assets, such as stocks or housing, during a recession, when the value is likely to be lower.

Regardless of which way markets trade in future, Kassar, Marshall and Kabot agree pre-retirees and retirees should have a financial plan that answers the big question: “What do I want the rest of my life to look like?” Once that’s established, and they have a roadmap, they can enjoy their retirement — in good economic times, and bad.